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Edited Transcript of CU.TO earnings conference call or presentation 25-Jul-19 2:00pm GMT

Q2 2019 Canadian Utilities Ltd Earnings Call

Calgary Jul 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Canadian Utilities Ltd earnings conference call or presentation Thursday, July 25, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Dennis A. DeChamplain

Canadian Utilities Limited - Senior VP & CFO

* Myles Dougan

Canadian Utilities Limited - Senior Manager of IR

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Conference Call Participants

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* Andrew M. Kuske

Crédit Suisse AG, Research Division - MD, Head of Canadian Equity Research, and Global Co-ordinator for Infrastructure Research

* Benjamin Pham

BMO Capital Markets Equity Research - Analyst

* Jeremy Rosenfield

Industrial Alliance Securities Inc., Research Division - Equity Research Analyst

* Linda Ezergailis

TD Securities Equity Research - Research Analyst

* Maurice Choy

RBC Capital Markets, LLC, Research Division - Analyst

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Presentation

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Operator [1]

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Thank you for standing by. This is the conference operator. Welcome to the Canadian Utilities Limited Second Quarter 2019 Results Conference Call and Webcast. (Operator Instructions)

I would now like to turn the conference over to Mr. Myles Dougan, Senior Manager Investor Relations. Please go ahead, Mr. Dougan.

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Myles Dougan, Canadian Utilities Limited - Senior Manager of IR [2]

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Thank you, Ariel. Good morning, everyone. We're pleased you could join us for our second quarter 2019 conference call. With me today is Executive Vice President and Chief Financial Officer, Dennis DeChamplain; and Assistant Controller, John Jeffery. Dennis will begin today with some opening comments on our financial results and recent company developments. Following his prepared remarks, we will take questions from the investment community.

Please note that a replay of the conference call and a transcript will be available on our website at canadianutilities.com and can be found in the Investors Section under the heading Events and Presentations.

I'd like to remind you all that our remarks today will include forward-looking statements that are subject to important risks and uncertainties. For more information on these risks and uncertainties, please see the reports filed by Canadian Utilities with Canadian Securities Regulators. And finally, I'd like to point out that during this presentation, we may refer to certain non-GAAP measures, such as adjusted earnings, adjusted earnings per share, funds generated by operations and capital investment. These measures do not have any standardized meaning under IFRS, and as a result, they may not be comparable to similar measures presented in other entities.

And now I'll turn the call over to Dennis for his opening remarks.

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Dennis A. DeChamplain, Canadian Utilities Limited - Senior VP & CFO [3]

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Thanks, Myles, and good morning, everybody. Thank you all very much for joining us today on our second quarter 2019 conference call. Canadian Utilities announced adjusted earnings in the second quarter of 2019 of $126 million or $19 million higher than the $107 million in the second quarter of 2018. Second quarter earnings growth was due to the favorable impact of electricity and natural gas transmission regulatory decisions, as well as ongoing growth in the regulated rate base, earnings growth in the hydrocarbon storage business, further cost efficiencies as well as income taxes.

During the quarter, we also entered into definitive agreements to sell non-regulated electricity assets. In May 2019, Canadian Utilities entered into definitive agreements to sell its entire Canadian fossil fuel-based electricity generation portfolio for aggregate proceeds of approximately $835 million, subject to customary closing adjustments. The sale will occur as 3 separate transactions. The transaction for Canadian Utilities' 50% ownership interest in the 260 megawatt Cory Cogeneration Station closed in July 2019. The remaining 2 transactions, 1 for 10 partly or fully owned natural gas-fired and coal-fired electricity generation assets located in Alberta and British Columbia and the other for Canadian Utilities 50% ownership in the 580 megawatt Brighton Beach Power joint venture in Ontario, are both expected to close in the second half of 2019.

In June 2019, Canadian Utilities, with its partner, Quanta Services Inc., entered into definitive agreements to sell Alberta PowerLine Limited Partnership through a competitive process for total proceeds of approximately $300 million, and the assumption of approximately $1.4 billion of APL debt. As part of these agreements, Canadian Utilities is offering an opportunity for indigenous communities along the transmission line to obtain up to a 40% equity interest in Alberta PowerLine. The final ownership mix will be determined upon close of the purchase opportunity for indigenous communities. Canadian Utilities will remain the operator of APL over its 35-year contract with the Alberta Electric System operator. The sale is expected to close in the fourth quarter of 2019, subject to receipt of regulatory approvals and satisfaction of other customary closing conditions.

On the utility side of our company, we received several regulatory decisions this quarter. As a result, we generated higher earnings in the quarter due to the favorable impact of the electricity transmission, 2018 to 2019 general tariff application, a natural gas transmission, 2019 to 2020 general rate application decisions.

Going forward, we continue to execute on our $3.6 billion capital investment plan over the next 3 years. We remain focused on building a globally diversified portfolio of utility and energy-related infrastructure assets, leveraging the breadth and depth of our energy expertise in the Alberta market.

That concludes my prepared remarks. And I'll now turn the call back to Myles.

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Myles Dougan, Canadian Utilities Limited - Senior Manager of IR [4]

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Thank you, Dennis. And I'll turn the call over to our conference coordinator now for questions.

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Questions and Answers

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Operator [1]

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We will now begin the question-and-answer session. (Operator Instructions)

Our first question comes from Linda Ezergailis of TD Securities.

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Linda Ezergailis, TD Securities Equity Research - Research Analyst [2]

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I'm wondering if you could help us navigate this Australia access arrangement for ATCO Gas down there? You gave -- you provided some helpful context in your MD&A, but I'm just wondering how we might think of the magnitude of the reset starting next year and some other moving parts with respect to -- other rebasing related to demand and throughput?

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Dennis A. DeChamplain, Canadian Utilities Limited - Senior VP & CFO [3]

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Thanks for your question. We can't say right now what the impact will be on 2020, because we won't be getting the final decision until September-October time frame. We -- what I can say is that the -- Australia will be subject to the binding rate of return guidelines that are out right now. If you were to take a look at the risk-free rate, say, right now, the relative return on equity will drop from 7.15% that we are -- have right now to about 5.15% or a 200 basis point drop in the ROE. For Australia, a 100 basis point reduction results in about a $7 million per year earnings impact. So that's part of the reset. But that risk-free rate is not finalized yet. That will be finalized between now and the decision, so it can move. And then there -- with regards to the other aspects of your question, with regards to throughput and demand, I mean, that will come out in the -- in that final decision right now. Bear in mind that, over the recent past, Australia has been performing about 300 basis points over and above the approved return. And as we saw with the Alberta PBR Utilities, when they came out of their first-generation 5-year PBR term, the out-performance was a little bit lower than what they have recently experienced, just given the nature of the reset on the operating costs and capital. So we would expect some of that 300 basis point historic outperformance to be eroded slightly going forward. But again, we can't say for certain until we get that final decision later on this year.

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Linda Ezergailis, TD Securities Equity Research - Research Analyst [4]

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Helpful context. And moving on to something maybe a little bit more aspirational, prospectively, in Western Canada, I see you're going to be adding another 19 EV charging stations in 2019 and 2020. Can you comment on the rationale? Is it more of a strategic toehold that you want to establish to understand the possibilities there? Are they already economic on a stand-alone basis? And what might be the ultimate potential of that foray into the EV world?

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Dennis A. DeChamplain, Canadian Utilities Limited - Senior VP & CFO [5]

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Yes. This is, we'll call it, a very small project. And as you say, only dipping our toe into it. We really believe in the future electrification of the transportation industry and getting our experience with the EV stations here in our home province will be a good foundation for future growth and opportunity in that market as we move forward. But it's not going to be a big moneymaker for us, that's for sure, our first 20 stations.

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Operator [6]

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Our next question comes from Ben Pham of BMO Capital Markets.

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Benjamin Pham, BMO Capital Markets Equity Research - Analyst [7]

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Some of your -- the tax benefits that you booked during the quarter in both regulated, nonregulated. I am just curious on the regulated side. Can you remind me, is that going to be a flow-through benefit to your customer as you ventured? Or you're going to keep some of that upside in the PBR regime?

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Dennis A. DeChamplain, Canadian Utilities Limited - Senior VP & CFO [8]

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No, Ben. Those -- the upside in the regulated companies comes from accelerated capital cost allowance measures that were introduced by the Government of Canada and enacted in April of 2019. So it is kind of a go-forward benefit to us. And those upside is not passed on to customers through PBR 2.

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Benjamin Pham, BMO Capital Markets Equity Research - Analyst [9]

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Okay. So your realized ROE that you had expected the beginning of the year, I mean, it looks like there's sort of some nice upside potential from that?

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Dennis A. DeChamplain, Canadian Utilities Limited - Senior VP & CFO [10]

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Yes, that helps both our electricity distribution and natural gas distribution companies. And that goes to, as we've been saying, like restock the saving shelves and the earnings opportunities. So that would help us get back to -- actually, we kind of already are at that -- the first trigger of 300 basis points 2 years in a row. Bear in mind that neither of those companies exceeded 300 basis points last year. So 500 basis points is not in the cards for either of those 2 companies this year. So 2019 will not, in our estimates right now, result in a reopener for either of those companies.

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Benjamin Pham, BMO Capital Markets Equity Research - Analyst [11]

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Yes, that's great. And my second question, and maybe with your asset sales on the power side and maybe a refresh on your BD, thoughts on -- just specifically on the power and some news on Heartland being pushed up the regulatory file, and you still own Oldman, but are you still looking to build out power in Alberta and Canada generally?

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Dennis A. DeChamplain, Canadian Utilities Limited - Senior VP & CFO [12]

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Probably not in Alberta, Ben. Take a look at the market, it's oversupplied right now. The government announced yesterday that they will be sticking with the energy-only market and kind of shelving the plans or holding the plans to conversion to a capacity market in abeyance. Either way, we don't view the ability for Canadian Utilities to secure long-term contracts -- profitable long-term contracts in the Alberta market as something that's available in the market right now given the oversupply position. And we are looking for utility long-term contracted assets. So to the extent that we could find those generation opportunities in the rest of Canada, we would look at that. We are attempting -- or more than attempting. We are diversifying geographically outside of Alberta and Canada as well. So really, our target markets, and we are looking at the rest of Canada, the United States, Latin America and Australia as well.

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Operator [13]

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Our next question comes from Andrew Kuske of Crédit Suisse.

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Andrew M. Kuske, Crédit Suisse AG, Research Division - MD, Head of Canadian Equity Research, and Global Co-ordinator for Infrastructure Research [14]

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Last year, you had a lot of heavy lifting with restructuring costs. And I guess, the question really is, you've had some pretty big reductions in operating expenses in a number of the segments. Are you really seeing the full benefit of just all the heavy lifting you did in the past years or this time around? And are these kinds of the run rates we should think about into the future?

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Dennis A. DeChamplain, Canadian Utilities Limited - Senior VP & CFO [15]

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Andrew, Yes. We are seeing the benefits of those -- the restructuring that we did. We took a restructuring charge in Q2 of 2018. That helped with the lower operating costs. We're seeing the benefit of those lower run rates now. We are continuing to look for advancements in opportunities and efficiencies with regards to the remaining base of the operating costs through information technology improvements and improvements to our kind of a workforce management and/or asset management in our utility systems. So we are continuing to advance opportunities to help lower that run rate going forward. And again, those go to help bolster our returns on equity above that, the approved returns that we've been seeing in the last number of years.

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Andrew M. Kuske, Crédit Suisse AG, Research Division - MD, Head of Canadian Equity Research, and Global Co-ordinator for Infrastructure Research [16]

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Okay. I appreciate the color. And then just on capital management, you've obviously had a few large-scale monetizations which are in their path to closing at this stage. So how do you think about further capital management, just of your existing asset base and then deployments? And I know you touched upon this earlier in the call, but deployments by looking at other things you can do in the core Alberta base or just elsewhere? And how do you weigh the opportunity side?

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Dennis A. DeChamplain, Canadian Utilities Limited - Senior VP & CFO [17]

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In terms of our existing portfolio, we continue to review, it's part of our ongoing process, where we review our existing assets and the strategic fit and performance, what have you, that has led to monetization of the generation assets and Alberta PowerLine. So we continue to look at that as part of our normal course of business. In terms of redeployment of that capital, we've kind of were patient with the capital. We're looking for the right opportunity, utility and utility-like investments in the target markets. We've got our corporate development teams along with the businesses working on opportunities as we speak. So we will continue on that path until we can effectively redeploy our capital.

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Operator [18]

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(Operator Instructions) Our next question comes from Maurice Choy of RBC Capital Markets.

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Maurice Choy, RBC Capital Markets, LLC, Research Division - Analyst [19]

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Just my first question is about, I guess, capital deployment again. I wonder whether you could provide us with an update on your discussions with the credit rating agencies. How discussions there may or may not affect how you look at what you buy, where you buy and the types of assets that you're looking at?

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Dennis A. DeChamplain, Canadian Utilities Limited - Senior VP & CFO [20]

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Thanks, Maurice. We discussed the monetization of our generation and Alberta PowerLine with our credit raters, let's say, commencing last year. We -- with that -- those sales, we'll say that improves the quality of the earnings predictable reliability, reliable earnings. Our percent share right now from our regulated assets is, I'll say, very high north of 90%. We believe that really should put us being judged on the S&P's low-volatility table, which would bring our FFO-to-debt levels down to about 10% to 11% in order to maintain our credit rating. So in order to maintain that credit rating, if we were to go on the low volatility table, we would be looking at targets in the M&A world that would help us stay on that low volatility table. So you're looking at the utility and utility-like investments that can continue to provide that high quality, stable cash flows and earnings. So those -- I'll say, those are the credit rating implications of our -- or un-implications, I should say, information that forms our view as to future deployment on the capital.

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Maurice Choy, RBC Capital Markets, LLC, Research Division - Analyst [21]

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And just to clarify, have they already commented on putting you in a low-volatility table? Or is there a timing that you can provide us on that decision?

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Dennis A. DeChamplain, Canadian Utilities Limited - Senior VP & CFO [22]

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No, they have not. I mean, we received confirmation of CU Inc.'s credit rating from DBRS this past week. We expect to hear from Standard & Poor's on our current credit review, I'll say, in the imminent future. So either July or August, we expect to hear from S&P.

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Maurice Choy, RBC Capital Markets, LLC, Research Division - Analyst [23]

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Okay. And then my second question, and this is -- you've already touched upon it, on the government's position to keep an energy-only market. Is there -- does there -- should we expect any impact at all on your sale process, whether it's the timing, the pricing or the overall process?

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Dennis A. DeChamplain, Canadian Utilities Limited - Senior VP & CFO [24]

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No, there's -- I'll say, there's no impact on our sale process as a result of the change in the market design in Alberta for any -- or either of the remaining 2 transactions that are expected to close in the second half of 2019.

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Operator [25]

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Our next question comes from Jeremy Rosenfield of Industrial Alliance Securities.

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Jeremy Rosenfield, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [26]

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Just one more follow-up, I guess, on the outlook for capital deployment. I am just curious, Dennis, when you're looking at growth opportunities, you highlighted on geographies, et cetera, and risk criteria, but in terms of sort of accretion and timing, are you thinking in terms of operating assets or an operating platform? Or are you thinking of investment opportunities that are, let's call them, late-stage development assets that could be built out, so there could be lag between deploying the capital and then when you start to realize earnings and cash flows from that investment?

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Dennis A. DeChamplain, Canadian Utilities Limited - Senior VP & CFO [27]

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Thanks, Jeremy. I don't think I can rule -- I wouldn't want to rule out either of those. I mean, for our operating assets on the M&A side or, looking at that, platforms for future growth. I mean, we're prepared to invest now for existing kind of expansion from those assets. So a platform for future growth in the target markets we're looking for is -- we're open to. In terms of late-stage developed assets, we would look at that. And we're also looking at Greenfield opportunities as well, which would -- the late-stage, once the project has been de-risked, you pay for that. So I don't know how much that earnings opportunity there would be if it's a -- if it comes down to a strict cost of capital. And there's not much we can add in terms of our operating regulatory expertise. I don't think we would win on a street fight with our cost of capital, but we would look at late-stage development opportunities.

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Jeremy Rosenfield, Industrial Alliance Securities Inc., Research Division - Equity Research Analyst [28]

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Okay. So it sounds like nothing is off the table. Okay, good.

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Operator [29]

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This concludes the question-and-answer session. I'd like to turn the conference back over to Mr. Myles Dougan for any closing remarks.

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Myles Dougan, Canadian Utilities Limited - Senior Manager of IR [30]

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Thanks, Ariel, and thank you all for participating this morning. We very much appreciate your interest in Canadian Utilities and look forward to speaking with you again soon. Bye for now.

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Operator [31]

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This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.